Kimbell Royalty Partners(US:KRP)2021-02-26 02:54PART I Item 1. Business Kimbell Royalty Partners, LP owns and acquires mineral and royalty interests in oil and natural gas properties across the United States, generating revenue without bearing operational costs - The company's primary business involves owning mineral and royalty interests, entitling it to revenue from oil and gas production without funding operational costs like drilling, completion, or abandonment64 Asset and Reserve Overview (as of Dec 31, 2020) | Metric | Value | | :--- | :--- | | Gross Mineral Interest Acres | ~9.1 million | | Gross Overriding Royalty Acres | ~4.6 million | | Gross Wells | >97,000 | | Proved Reserves (PDP) | 42,418 MBoe | | Liquids Percentage of Reserves | 43.3% | | Average 5-Year PDP Decline Rate | 12.5% | Revenue Breakdown by Commodity (FY 2020) | Commodity | Percentage of Revenue | | :--- | :--- | | Oil Sales | 56% | | Natural Gas Sales | 34% | | NGL Sales | 9% | | Other Sales | 1% | - The company's business strategy focuses on acquiring additional mineral and royalty interests, benefiting from organic development by operators, and maintaining a conservative capital structure8384 Item 1A. Risk Factors The company identifies numerous risks to its business, with the most significant being the volatility of oil and gas prices, dependence on unaffiliated operators, and structural partnership limitations - The COVID-19 pandemic and its impact on oil and gas prices are cited as a primary risk, having already led to a significant impairment charge of $251.6 million in 2020 and potentially affecting operator activity, borrowing base, and future distributions210214215 - A core operational risk is the complete dependence on unaffiliated operators for all exploration, development, and production activities, as their decisions directly affect the company's revenue streams317318 - Structural risks include potential conflicts of interest with the General Partner and its affiliates, who may favor their own interests, and the partnership agreement replacing standard fiduciary duties with contractual ones, limiting remedies for unitholders234249 - The company's ability to grow and pay distributions is limited by its policy of distributing all available cash, which necessitates reliance on external financing for acquisitions, and failure to make accretive acquisitions would limit growth and could lead to reduced distributions over time as reserves deplete229333341 Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments408 Item 2. Properties Information regarding the company's properties is incorporated by reference from "Item 1. Business" of this report - The information required for this item is contained in "Item 1. Business"409 Item 3. Legal Proceedings The company states that while it may be involved in various legal claims in the normal course of business, it does not believe the resolution of these matters will have a material adverse impact on its financial condition or results of operations - The company is not involved in any legal proceedings that are expected to have a material adverse impact410 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable411 PART II Item 5. Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities The company's common units trade on the NYSE under the symbol "KRP", with a cash distribution policy recently adjusted to repay debt, and details on unregistered equity issuances - The company's common units are listed on the NYSE under the symbol "KRP" As of February 19, 2021, there were 38,918,689 common units and 20,779,781 Class B units outstanding414 - The cash distribution policy requires distributing all available cash each quarter, but due to the economic impact of COVID-19, the Board allocated 25% of cash available for distribution for Q4 2020 ($3.9 million) to repay outstanding debt and intends to continue this practice in future quarters415416 - In connection with the Springbok Acquisition on April 17, 2020, the company issued 2,224,358 common units and 2,497,134 Class B units in an unregistered sale432 Item 6. Selected Financial Data Selected financial data for the past five years highlights a net loss of $256.1 million in 2020 due to a significant impairment charge and lower revenues Selected Statement of Operations Data (in millions) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenues | $90.5 | $108.2 | $70.3 | | Impairment of oil and natural gas properties | $251.6 | $169.2 | $67.3 | | Operating (Loss) Income | ($250.7) | ($151.6) | ($48.2) | | Net (Loss) Income | ($256.1) | ($158.2) | ($52.3) | | Adjusted EBITDA (Non-GAAP) | $65.9 | $80.7 | $44.2 | Selected Balance Sheet Data (in millions, as of year-end) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $564.6 | $748.6 | | Long-term Debt | $171.6 | $100.1 | | Total Equity | $335.6 | $565.0 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of the COVID-19 pandemic and commodity price volatility on 2020 results, leading to a major impairment charge and decreased operating cash flow - The business environment in 2020 was dominated by the COVID-19 pandemic and OPEC actions, causing a significant reduction in global oil demand and price volatility, which led to a 57% decrease in active land rigs in the U.S. and a 52% decrease on the company's acreage from year-end 2019 to 2020463477480 Year-over-Year Results of Operations Comparison (2020 vs. 2019) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Oil, Gas & NGL Revenues | $92.6M | $107.5M | ($14.9M) | | Production Volumes (Boe) | 5,072,635 | 4,515,867 | +556,768 | | Impairment Expense | $251.6M | $169.2M | +$82.4M | | Net Loss | ($256.1M) | ($158.2M) | ($97.9M) | | Operating Cash Flow | $62.2M | $80.7M | ($18.5M) | - The company recorded a $251.6 million impairment in 2020 due to the decline in the 12-month average SEC prices for oil (down 28.9%) and natural gas (down 22.9%), as well as a determination that its Proved Undeveloped (PUD) reserves no longer had reasonable certainty of development491525873 - As of December 31, 2020, the company had $171.6 million in outstanding borrowings under its secured revolving credit facility, with $93.4 million of available capacity, and the borrowing base was $265.0 million558 - Subsequent to year-end, on January 27, 2021, the company entered into an interest rate swap, fixing the interest rate on $150.0 million of notional debt at approximately 3.9% for three years460586 Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are commodity price volatility and interest rate risk, partially mitigated by derivative contracts and an interest rate swap - The main market risk is commodity price volatility, which the company mitigates using derivative contracts (fixed price swaps), though these are not designated as accounting hedges, meaning fair value changes impact current earnings578581 - The company has interest rate risk on its $171.6 million of debt, where a 1% increase in rates would increase annual interest expense by approximately $1.7 million, a risk partially addressed post-year-end with an interest rate swap fixing the rate on $150 million of the debt585586 - The company has customer concentration risk, with its top purchaser accounting for 7.1% of oil, natural gas, and NGL revenues in 2020583 Item 8. Financial Statements and Supplementary Data This section indicates that the company's consolidated financial statements are included in the report, beginning on page F-1 - The Partnership's consolidated financial statements are included in the Annual Report beginning on page F-1588 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported589 Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal controls over financial reporting were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020590 - Based on the COSO framework, management concluded that internal controls over financial reporting were effective as of December 31, 2020596 - No changes in internal control over financial reporting occurred during the fourth quarter of 2020 that materially affected, or are reasonably likely to materially affect, internal controls598 Item 9B. Other Information The company reports no other information for this item - None599 PART III Item 10. Directors, Executive Officers and Corporate Governance This section provides information on the General Partner's directors and executive officers, including committee structures and corporate governance exemptions - The executive officers are Robert D. Ravnaas (CEO), R. Davis Ravnaas (President & CFO), and Matthew S. Daly (COO)602 - The Board of Directors has an Audit Committee and a Conflicts and Compensation Committee, both composed of three independent directors: William H. Adams III, Craig Stone, and Erik B. Daugbjerg619622 - The company has adopted a Code of Business Conduct and Ethics, which is available on its website626 Item 11. Executive Compensation Executive compensation, determined by the Conflicts and Compensation Committee, includes base salary, long-term incentive restricted units, and short-term cash bonuses - The company does not directly employ its executive officers; they are compensated by Kimbell Operating under a management services agreement, with costs indirectly paid by the Partnership629631 2020 Named Executive Officer Compensation Summary | Name | Position | Salary | Long-Term Incentive | Non-Equity Incentive | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Robert D. Ravnaas | CEO | $575,000 | $2,186,663 | $790,625 | $3,798,178 | | R. Davis Ravnaas | President & CFO | $550,000 | $1,692,900 | $756,250 | $3,184,031 | | Matthew S. Daly | COO | $450,000 | $1,199,138 | $618,750 | $2,392,967 | - The Long-Term Incentive Plan (LTIP) authorizes up to 4,541,600 common units for awards like restricted units, which generally vest in one-third installments over three years656662648 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters This section details the beneficial ownership of the company's units, including significant holders and the collective ownership of directors and executive officers - As of February 19, 2021, all directors and executive officers as a group beneficially owned approximately 8.4 million common units (assuming full exchange of Class B units), representing 14.1% of the total687 - Major beneficial owners (over 5%) include Kimbell Art Foundation (8.6%), PEP III Holdings, LLC (9.0%), PEP II Holdings, LLC (5.6%), and EIGF Aggregator III LLC (6.5%), assuming full conversion of Class B units687 - The General Partner is wholly owned by Kimbell GP Holdings, LLC, which is controlled by affiliates of founders Robert D. Ravnaas, Brett G. Taylor, Mitch S. Wynne, and Ben J. Fortson697698 Item 13. Certain Relationships and Related Transactions, and Director Independence The company has numerous relationships and transactions with its General Partner, Sponsors, and their affiliates, including participation rights and management service agreements - The company has a right to participate in up to 50% of certain acquisitions for which founders Messrs. R. Ravnaas, Taylor, and Wynne provide diligence or other business services726 - The company has a management services agreement with Kimbell Operating, which in turn has agreements with entities controlled by Sponsors (Messrs. Fortson and Wynne) to provide management, administrative, and acquisition services734735 - Registration rights have been granted to sellers from the Haymaker, Dropdown, Phillips, and Springbok acquisitions, allowing them to sell their common units in the public market707710714717 Item 14. Principal Accounting Fees and Services The company engaged Grant Thornton LLP as its independent registered public accounting firm, with all services pre-approved by the Audit Committee Fees Paid to Grant Thornton LLP (in thousands) | Fee Type | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Audit Fees | $691.6 | $543.4 | $514.2 | | Audit-Related Fees | $0.0 | $0.0 | $69.8 | | Tax Fees | $0.0 | $0.0 | $0.0 | | All Other Fees | $0.0 | $0.0 | $0.0 | | Total | $691.6 | $543.4 | $583.9 | PART IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report, including key corporate documents and required certifications - This item lists all financial statements and exhibits filed with the report, including consents from auditors Grant Thornton LLP and reserve engineers Ryder Scott Company, L.P766775 Item 16. Form 10-K Summary The company has elected not to include a summary for this item - The Partnership has elected not to include summary information777 Financial Statements and Supplementary Data Consolidated Financial Statements The audited consolidated financial statements for the years ended December 31, 2020, 2019, and 2018 are presented, showing a net loss of $256.1 million for 2020 Consolidated Balance Sheet Highlights (as of Dec 31, 2020) | Account | Value (in millions) | | :--- | :--- | | Total Current Assets | $28.3 | | Total Oil and Natural Gas Properties, net | $521.0 | | Total Assets | $564.6 | | Total Current Liabilities | $8.8 | | Long-term Debt | $171.6 | | Total Liabilities | $186.3 | | Total Equity | $335.6 | Consolidated Statement of Operations Highlights (Year ended Dec 31, 2020) | Account | Value (in millions) | | :--- | :--- | | Total Revenues | $90.5 | | Impairment of oil and natural gas properties | $251.6 | | Operating Loss | ($250.7) | | Net Loss | ($256.1) | | Net Loss attributable to common units | ($167.4) | Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial results, including the 2020 impairment charge, derivative instruments, debt, equity, and related-party transactions - The company follows the full-cost method of accounting for its oil and gas properties, capitalizing all acquisition, exploration, and development costs826 - The 2020 impairment of $251.6 million was driven by a decline in the 12-month average commodity prices and the reclassification of all PUD reserves due to drilling uncertainty873874 Change in Proved Reserves (MBOE) | Period | Beginning Balance | Revisions | Purchases | Production | Ending Balance | | :--- | :--- | :--- | :--- | :--- | :--- | | 2020 | 43,563 | (359) | 4,286 | (5,072) | 42,418 | | 2019 | 37,651 | 5,766 | 4,661 | (4,515) | 43,563 | - The standardized measure of discounted future net cash flows from proved reserves decreased from $400.0 million at year-end 2019 to $285.0 million at year-end 2020, primarily due to lower commodity prices944